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Crediting Wind and Solar Renewables in Electricity Capacity Markets: The Effects of Alternative Definitions upon Market Efficiency

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  • Cynthia Bothwell and Benjamin F. Hobbs

Abstract

As the penetration of variable renewable energy in electricity markets grows, there is increasing need for capacity markets to account for the contribution of renew-ables to system adequacy. An important issue is the inconsistent industry definition of capacity credits for resources whose availability may be limited, such as renewable generation. Inaccurate credits can subsidize or penalize different resources, and consequently distort investment between renewables and non-renew-ables, and also among different types and locations of renewables. Using Electric Reliability Council of Texas (ERCOT) data, we use a market equilibrium model to quantify the resulting loss of efficiency due to capacity credits alone and in combination with renewable tax subsidies and portfolio standards. Layering inaccurate capacity credits with existing US federal tax subsidies decreases efficiency as much as 6.3% compared to optimal capacity crediting under those subsidies. Compensating producers based on their marginal contributions to system adequacy, considering how renewable penetration affects the timing of net load peaks, can yield an efficient capacity market design.

Suggested Citation

  • Cynthia Bothwell and Benjamin F. Hobbs, 2017. "Crediting Wind and Solar Renewables in Electricity Capacity Markets: The Effects of Alternative Definitions upon Market Efficiency," The Energy Journal, International Association for Energy Economics, vol. 0(KAPSARC S).
    • Handle: RePEc:aen:journl:ej38-si1-bothwell
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    References listed on IDEAS

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    1. Peter Cramton & Axel Ockenfels, 2012. "Economics and Design of Capacity Markets for the Power Sector," Papers of Peter Cramton 12cocap, University of Maryland, Department of Economics - Peter Cramton, revised 2012.
    2. Neuhoff, Karsten & De Vries, Laurens, 2004. "Insufficient incentives for investment in electricity generations," Utilities Policy, Elsevier, vol. 12(4), pages 253-267, December.
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    JEL classification:

    • F0 - International Economics - - General

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